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Warren Buffett Says: “Stocks are safe for the long run, but unsafe tomorrow”

Credit: Fool Editorial Photos

Warren Buffett is widely regarded as the one of the best investors of our generation.

As the chairman of Berkshire Hathaway, Buffett has produced a compounded annual gain of 19% in the company’s book value between 1965 and 2016. Shareholders who stuck with Buffett’s company through that period would have turned every dollar invested into almost two million dollars.

Given his accomplishments, there is plenty that investors can learn from Buffett. In a recent interview with CNBC, he explained how investing is not always about the things we do; it is also about the things we do not do.

Stocks: Safe for the long run, but dangerous tomorrow

In the interview, Buffett talked about one thing that investors should avoid:

“But if you’re going to need – you shouldn’t borrow money against stocks. And you shouldn’t – if you’re going to need some money for college or something in a year, you don’t want to be in stocks because you don’t have any idea what stocks are going to sell for in a year. It’s inappropriate.

But stocks are safe for the long run and they’re very unsafe for tomorrow.”

At the Motley Fool, we believe that investors should not invest with money that they may need in the next five years. That’s because stocks can be volatile over the short-term.

Take for instance, the SPDR STI ETF (SGX: ES3), an exchange traded fund that mimics the fundamentals of the Straits Times Index (SGX: ^STI). In mid-April 2015, the ETF peaked at around $3.54 and proceeded to decline almost 28% to around $2.55 when it bottomed out in February 2016. The ETF has since recovered to $3.13 (as of last Monday).

The movements demonstrate how stock markets can be volatile in the short term. But over the longer term, the SPDR STI ETF has produced total annual returns of almost 7% from its inception in April 2002 up to the end of January 2017.

For Buffett, the most important long-term investing consideration is the quality of the business he is looking at. He said:

“You know, that’s what you’re buying, is a business. You’re not buying a stock, you’re buying a piece of a whole bunch of businesses. Are those businesses going to be worth more ten or 20 or 30 years from now? Of course, they are.

But if you think you can jump in and out or that you know the time to come in, then I think you’re making a mistake.”

Buffett believes that investors should focus on finding companies that have the potential to be worth more over the next decade or longer. For stock market participants who jump in and out of their investments, Buffett believes that it is a mistake to do so.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Berkshire Hathaway.